As a small business owner, you have agreements with other businesses. You have agreements and leases for your location, supplies, parts, services, equipment, and other things you require to produce your product, provide your services, or simply keep your company going. Typically, vendors are a company’s second largest expense after labor.
Your relationship with each of your manufacturers, retailers, and wholesalers is (or should be) directed by a written agreement. This vendor contract includes details on price, quantity, deadlines, and more. Often in the contract is a clause that states what happens if the vendor (or you) fails to do what it agreed to do in the contract. The clause may also lay out the penalties and damages to cover the loss because of the a party’s failure to perform their obligation.
What is a Breach of Contract?
A breach of contract is simply when one party to the contract doesn't do what they agreed to do. They failed to fulfill their side of the deal. A vendor can breach the contract by refusing to perform its obligations under the contract, acting in a way that’s prohibited by the contract, or preventing another party from performing its obligations under a another agreement.
A material breach of contract is a (near) total breakdown of the deal, and you can determine whether a breach of contract is material by examining these factors:
- If the breach causes significant legal, financial, or reputational damage that undermines the purpose of the agreement;
- If the breach keeps the non-breaching party from getting the benefits that are stated in the contract; or
- If the breach was intentional or negligent or just an accident or unintentional oversight.
If you believe that the breach has any of these factors, you should take further action to resolve the problem.
How Can You Resolve the Issue?
There are a number of actions you can take if you think a vendor’s breached a contract. Here are some suggestions on how to proceed:
Resolving the Matter Privately. When there’s a possible breach of contract, you don’t have to immediately file a complaint in court. The first step should be to try to discuss the issue privately. Collect relevant documentation and contact the breaching party with a formal notice to explain how, why, and when they breached the contract. This gives them a chance to resolve the matter. If the breach can be remedied or cured, ask the breaching party to correct the issue, which may require them to fulfill missed obligations, deliver promised materials, or provide the services to which they agreed in the contract. They must do this right away in good faith so that the contract can move forward without further action.
Terminate the Contract. If the breach resulted in irreparable harm to your business that caused lasting damage, you should cancel the contract. Consider working with an experienced business law attorney before you terminate the agreement as you may incur penalties for doing so.
Consider Mediation or Arbitration. Mediation is a nonbinding process where a neutral third party facilitates discussions between you and the breaching party in an attempt to find a mutually-agreeable resolution. Mediation is less expensive and less formal than other recourses—plus, you may be able to keep the business relationship intact. With arbitration, an arbitrator hears the case of both parties and then comes to a decision. It’s wise to have a business attorney work with you to help you prepare and present your case. Arbitration is faster than litigation, and private, but it can become expensive quickly.
Bring a Lawsuit. If the parties can’t resolve the dispute privately, the non-breaching party can initiate a civil lawsuit and seek damages. The court can award compensatory, liquidated, and nominal damages to bring the non-breaching party back to the financial position they were in prior to the breach. Of course, lawsuits are public, lengthy in nature, and can become very expensive.
Each case’s circumstances are unique and will dictate the appropriate remedies. Moreover, each remedy for breach of contract has its advantages and drawbacks, and you should review your situation with an experienced business law attorney.
How You Don’t Resolve The Issue
We know that life seems to be lived online these days, but blasting businesses publicly is not usually the best tactic. Businesses that have been attacked online tend to be less inclined to assist resolving problems. Further, if you aren’t careful in your wording, you can face claims of disparagement, libel, slander and/or defamation. As a business owner, you wouldn’t want someone to do that to you, we think the Golden Rule is good to apply here as well.
Work with Us
When a material breach of contract happens, it’s critical to have your documentation available to support your claim. This can include emails or written documents, such as invoices and payment records; a record of missed deadlines and/or performance failures; and the original signed contract. These material should demonstrate the way that the breaching party failed to complete their obligations.
We are happy to try to resolve the issue and help you come out of the situation without any further damage or interruption.
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Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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